Brexit could lead to prolonged economic contraction, IMF warns

The International Monetary Fund (IMF) has warned that Britain faces a prolonged period of economic contraction, weaker spending and higher unemployment if it votes to leave the EU next week.

In a stark assessment of the potential impact of Brexit, contained in the IMF’s latest annual health check on the UK economy, the Washington-based fund said a vote to leave would “entail substantial economic, financial costs”.

It said the UK would have to renegotiate trade relationships with the 60 non-EU economies currently governed by EU agreements.

“These negotiations could drag on for years, leading to a period of heightened uncertainty and risk aversion, which in turn would discourage consumption and investment and roil financial markets,” the IMF said.

The fund’s decision to publish its latest report on the UK economy just a week before the vote has enraged Leave campaigners, who claim it should not be pronouncing on the economy ahead such a key referendum.

The IMF delayed the report, which had been due on Thursday, by 24 hours following the murder of Labour MP and "Remain" campaigner Jo Cox.

In its report, the IMF said most formal assessments agreed that the UK would be worse off economically if it were to leave the EU, as higher trade and financial barriers would lead to lower output and incomes.

It also warned that London’s status as a global financial hub may be damaged if Britain were outside the bloc.

An exit would have implications for the “passporting” arrangements of financial institutions, which allows them provide services across the EU, it said, and on the location decisions of major international financial firms currently headquartered in London.

In its report, the IMF highlighted two possible post-Brexit scenarios for the UK and their likely effect on growth.

The first assumes London negotiates a status similar to that enjoyed by Norway, which is part of the European Free Trade Area and accepts the free movement of labour as part of its access to the single market, a potential sticking point for the UK, where immigration is a key plank of the Out campaign.

Nonethless, in this case, the IMF predicted gross domestic product (GDP) would fall by 1.5 per cent by 2019 compared to its current trajectory.

The second more adverse scenario involves the UK defaulting to the trade rules of the World Trade Organisation, in which case, GDP is forecast to plunge by 5.5 percent by 2019.

“In both cases, the impact on output and employment could be significantly negative due to higher uncertainty. The longer this uncertainty persists, and the less advantageous the outcome of trade negotiations for the UK, the larger are these short- and medium-run costs,” the IMF said.

IMF chief Christine Lagarde said the IMF was "neutral" in Britain's highly charged political debate, but that the facts spoke for themselves. "I certainly hope that from our neutral position we can at least shed some light on the economic value of one choice or the other," she said, adding that most British people had benefited from EU membership.

Additional reporting Reuters